Abercrombie's Fashion Fail Is No Shocker

Abercrombie & Fitch (NYS: ANF) is no stranger to shocking moments; one of its most recent attention-grabbers was its smug announcement it planned to shell out a "significant payment" to block the Jersey Shore cast from wearing its brands. Here's one moment that isn't particularly shocking: its disappointing European performance this week. Abercrombie probably had it coming.

The teen retailer's shares plunged earlier this week after it reported disappointing sales trends at European flagship stores, as well as continued sluggishness in Japan and Canada. The stock took a drubbing as investors likely realized that this shrinking retailer can't hinge hope on overseas stores as it closes doors here in the U.S., and that poses deep questions about future growth.

Even worse, Bloomberg pointed out that CEO Mike Jeffries talked up "strong momentum" in Europe in August. Incidentally, that's the same month management decided reality show stars might create "damage to our image" so it would reward them with a payment. Oh dude, FAIL!

Abercrombie's willfully cultivated "image" is one of the reasons I avoid the stock like the plague. Take the prose in its 10-K, describing several of its brands:

Abercrombie & Fitch. Rooted in East Coast traditions and Ivy League heritage, Abercrombie & Fitch is the essence of privilege and casual luxury. ... A combination of classic and sexy creates a charged atmosphere that is confident and just a bit provocative. Idolized and respected, Abercrombie & Fitch is timeless and always cool.

Hollister. Hollister is the fantasy of Southern California. It is the feeling of chilling on the beach with your friends.

Gilly Hicks. Gilly Hicks is the cheeky cousin of Abercrombie & Fitch.

Form 10-K prose is usually (probably purposefully) about as dull as it gets, so I'll admit it's fascinating that Abercrombie's reads as vapid and arrogant, and actually kind of funny. Always cool? Double-digit same-store sales declines in the years ended January 2009 and 2010 certainly seem chilly, but hardly imply "always cool." As for Gilly Hicks, "cheeky" might be spot-on, since the website has a history of being NSFW.

Abercrombie's not a shareholder-friendly company; don't forget the board dreamed up the bizarre plan to pay Jeffries $4 million to limit his use of the corporate jet. I don't even think it's a particularly customer-friendly company. There are ongoing allegations about its marketing's lack of diversity and the way it mistreats supposedly "less attractive" workers (there's a "look" policy) implies disrespect for most individuals. That's not "aspirational," it's asinine.

Abercrombie shares now trade at a cheaper forward multiple than many peers. It's trading at 12 times forward earnings, while Aeropostale (NYS: ARO) trades at 17 times forward earnings, Buckle (NYS: BKE) trades at 14 times forward earnings, and Urban Outfitters (NAS: URBN) trades at 15 times forward earnings. Still, these other rivals look like better, more secure deals when you consider the possibility of backlash against Abercrombie.

Investors should think twice before buying into the sketchy, unpleasant fantasy world Abercrombie & Fitch represents, because teens in international markets may indeed fail to consider its brands "always cool."